Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
There is no secret pact between central bankers to start tightening monetary policy after all. The Reserve Bank of Australia was unmoved on Tuesday, keeping cash interest rates at 1.5%, and the language of its announcement, studiously neutral. In the space of an hour, the Aussie dollar dropped 0.7%, to 76 American cents.
Now, few have expected the bank's board to increase what is, by the standards of developed world monetary policy, a towering short-term rate of interest. Yet, the Australian economy, 26 years into the miracle of a recession-free expansion, is expected to grow another 2.6% this year. Markets have spent the last two weeks reacting to central banks talking up the possibility of a more restrictive approach. So a change of tone or language would have fit the narrative of coordinated central bank action.
Instead, two conclusions stand out-- first of which is the central role currencies are likely to play as policy makers try to finesse the impact of their words. The Reserve Bank has for years said that Australia benefited from a weakening currency since 2013, and that a stronger dollar-- that would complicate adjustment from the mining boom. The effect matters even more so now that foreign exchange markets have become the fastest and clearest indicators of bets on monetary policy. In the last two weeks, the Canadian dollar has jumped the most against the dollar of the heavily traded currencies, up 2.6% after policymakers signalled a first rise in interest rates in seven years was imminent. A stronger currency, however, can hinder a fragile economic recovery, rendering policy maker plans moot.
The second point is a reminder that wage pressure, a crucial factor in the acceleration of price inflation, remains absent in Australia and elsewhere. While the Reserve Bank said employment continues to grow, it's added a caveat which should be familiar to American and European ears. It said "wage growth remains low, however, and this is likely to continue for a while yet." Markets have been behaving as if higher inflation and tighter policy is just around the corner, but the evidence for the former, well, it isn't quite there yet.